Reserve Bank tightens bank credit for Auckland property investors

In response to the growing housing market risk in Auckland, the Reserve Bank is today announcing proposed changes to the loan-to-value ratio (LVR) policy. The policy changes, proposed to take effect from 1 October, will:

Require residential property investors in the Auckland Council area using bank loans to have a deposit of at least 30 percent.

Increase the existing speed limit for high LVR borrowing outside of Auckland from 10 to 15 percent, to reflect the more subdued housing market conditions outside of Auckland.

Retain the existing 10 percent speed limit for loans to owner-occupiers in Auckland at LVRs of greater than 80 percent.

So the new rules will be:

100% of property investors in Auckland will need at least a 30% deposit to buy property

85% (was 90%) of home buyers outside Auckland will need at least a 20% deposit to buy a property

90% of non investor home buyers in Auckland will need at least a 20% deposit to buy a property

I think the changes are sensible and better targeted. Those outside Auckland will find it easier to get a mortgage. Non-investors in Auckland will have no change (or may find it slightly easier as investors will find it harder), and property investors in Auckland will not be able to get financing unless they can cover 30% from their own reserves.

The Reserve Bank is consulting on its proposal, and if they proceed, will implement them on 1 October.

Mr Wheeler said the Bank thought that the moves would reduce the number of property transactions in Auckland by 8 – 10% and possibly reduce house price inflation by 2 – 4% “MAYBE EVEN MORE THAN THAT”.

Conversely the moves would give a slight boost to the property market outside Auckland and Mr Wheeler estimated that sales there could pick up by about 4% and “maybe house price inflation by about one per cent.”

The RB move won’t solve the fundamental issue of not enough land in Auckland has been made available for housing, but it will help.

Comments (52)

David Garrett

dave_c_

In my view, this will make very little difference on the puchasing side – such ‘investors’ are usually flush with cash anyway. However, if a slow down in investment occurs, then impacts will be on availability, and increase in rental prices.

SPC

Bob R

***The RB move won’t solve the fundamental issue of not enough land in Auckland has been made available for housing, but it will help.***

My understanding was that the government could adjust immigration policy too? It seems that a net population increase of 1% via immigration equates to 10% rise in house prices. That relationship goes back to the 1960’s. So why not reduce the number coming in?

If Reserve Bank’s Michael Reddell is correct, this would also lead to better returns on the market reforms from the 1980’s onward.

“Immigration boosts both the demand and the supply sides of the economy, but the demand side first.

Because people have to live somewhere, we had surges in residential investment as a share of GDP in the middle of the last decade, and to a lesser extent the mid-1990s, which were a lot higher than in the OECD as a whole.

Business investment, by contrast, has been around or below the OECD median since the late 1980s.

“But over that period we have had among the fastest rates of population growth, so we needed more investment as a per cent of GDP than the median OECD country just to maintain the capital stock per worker.”

Reddell concludes that the rapid population growth rates successive governments chose to pursue look to have crowded out real business investment.

“With relatively low national savings rates and with a relatively well-educated and skilled domestic workforce, it isn’t obvious that applying a lot more labour to the situation was the route to success in trying to reverse decades of relative economic decline.”

One might go further and say it has let businesses off the hook, shielding them from the competitive discipline of having a common labour market with Australia.

By constantly topping up the labour supply it has perpetuated a low capital-to-labour ratio, low productivity and low incomes.”

Investors will come south. Better investments anyway. Speculators will still speculate. Renters will find less houses available and that thier rents will rise even more.

What is it with RBNZ Govenors and Cabinet Ministers who think they can fuck around with the market.

Four rules.
1. You can’t beat the market.
2. When a fence is erected someone finds a way around, over or under the fence. (Muldoon never figured that out and these turkeys didn’t learn from history)
3. Actions have reactions.
4. Actions have unforeseen consequences.

When has any intervention by the RBNZ ever done any good. NZ’s GDP has been a lagard for at least 20 years. All because these dumb fucking socialists think they can control things.

Who is now going to buy houses to rent to those that need a home?

yep the taxpayer once more.

Fucking idiots.

I read today that the biggest driver of house prices in Auckland is the Universities. They are creating an immigration rush that is unchecked.
Seems about right to me.

It’ll cause prices in Wellington Hamilton and Christchurch to rise. Great news if you’re a property investor in these areas. It may even endow the investor with the equity to circle back in and pick up an investment property or two in Auckland over the next four years.
If the Chinese or Babyboomers have 20% equity or cash they have 30%. So we’re in store for across the board house price inflation in New Zealand.
Excepting the boondocks. More house price inflation and less investment in business means a shrinking tax base. Less support for the provinces.
Beats the crap out of me why the RB goes down this tried and proven to fail track. The market always wins.
Mwaa hahahaha!

stephieboy

BananaLama, certainly we think about controlling the immigration flow but we cannot control the flow of New Zealanders returning home which is also contributing to this disastrous housing crises in Auckland.

Manolo

peterwn

I made a long comment on this under today’s General Debate where I predicted that house prices would fall because there would be a net volume of sales from investors to owner-occupiers and the fall in prices would slow down new house building. Some responses were that prices would not fall, but would rise – fair enough. It may be that prices will dip even if ever so slightly then skyrocket. I did also indicate that in the longer term house prices would in due course skyrocket, probably even more so than if the Reserve Bank had not intervened.

The Reserve Bank has IMO taken into account inappropriate political sensitivities in its decision making. Prospective owner-occupiers have been left alone because to impose a 30% deposit on them would be political dynamite. I think the Reserve Bank perceive that landlords and tenants have small political clout so action could be safely taken against landlords. I view the move as a kick in the guts for tenants, at least those who do not qualify for ‘social housing’. As it is they are effectively at a tax disadvantage compared with owner-occupiers and this move will put them at an even further general disadvantage.

The Reserve Bank had the power and authority to decide this, but in doing so has left various Ministers (eg Welfare Minister) with a very big headache. To start with, the Minister of Finance should be asking officials to come up with a plan in time for the Budget to ‘level’ the tax situation for tenants to that of owner-occupiers (note that historically, when most UK houses were rented, UK owner-occupiers were required to pay income tax on the assessed rental value of their houses, but could deduct mortgage interest, maintenance, etc).

The likes of Ollie Newland and Bob Jones will either be shaking their heads or laughing. They know that shrewd landlords (especially those already with a few properties) will see a golden opportunity here.

waikatosinger

This will have very little effect on the market, positive or negative. I don’t really see it having much effect on rents; to me that argument just looks like a bit of bleating from landlords.

I don’t think this measure is aimed at fixing the housing market. That would be beyond the RBs mandate. The RB is mostly concerned with ensuring stability in the banking sector. This measure will help ensure banks do not get overexposed to the Auckland property market and will be able to safely withstand a property market correction. Owner-occupiers will usually swallow a price correction and keep making payments. Property investors and speculators tend to be more exposed. If they go bankrupt the bank has to eat the loss. It makes sense therefore to target these rules at investors.

peterwn

I agree with the Reserve Bank Governor that the move will not lead to ‘sharp rent hikes’. However the move will put gradual upward pressure on rentals as it starts to bite ie landlords gradually selling out to owner-occupiers.

It could be too that a secondary loan market could emerge that exploits spare lending capacity on lightly mortgaged or mortgage free homes.

hj

stephieboy (5,356 comments) says:
May 13th, 2015 at 3:06 pm

BananaLama, certainly we think about controlling the immigration flow but we cannot control the flow of New Zealanders returning home which is also contributing to this disastrous housing crises in Auckland.
….
National, Labour and the Green party are pro immigration so there is no will to cut immigration.

hj

Viking2 (12,391 comments) says:
Four rules.
1. You can’t beat the market.
2. When a fence is erected someone finds a way around, over or under the fence. (Muldoon never figured that out and these turkeys didn’t learn from history)
3. Actions have reactions.
4. Actions have unforeseen consequences.
….
Labour globalised the NZ property market; some “hedge cites” are de linked from local economies.http://www.newyorker.com/magazine/2014/05/26/real-estate-goes-global
As Dr Clydesdale says
“as the sector gets larger, it gains in lobbying/political strength and can
lobby for immigration regardless if it is the best interests of the economy as a whole. This
could be seen in Canada where the development industry has lobbied hard for high sustained
immigration levels (Ley and Tutchener 2001). ”http://kauri.aut.ac.nz:8080/dspace/bitstream/123456789/205/1/clydesdale.GrowingPains.pdf

Coleman said the working group was not anti-immigration, but called on the government to investigate limits in the future, something Immigration Minister Dr Jonathan Coleman does not seem inclined to consider.

In a statement to the Sunday Star-Times, Coleman said: “Department of Labour research shows there is no strong link between immigration and house prices and migrants provide a net gain to the New Zealand economy of around $1.9 billion a year. If migration stopped today, the economy would contract by 10% over 10 years.”

Fentex

I think the changes are sensible and better targeted.

How on earth can anyone who has ever extolled the virtues of the free market, individual liberty and/or personal independence to pursue wealth and self interest possibly write this about state imposed controls to purposefully limit the functions of a market?

To do so seems to be to repudiate the position of the virtues of free markets. When did DPF change his mind about this? Surely DPF’s opinion is not entirely contingent on what the government supports?

peterwn

Fentex – The issue here is protection of the banking system which unfortunately is tending towards being a Sovereign function. A bank failure not only results in potential of depositors’ funds, there is the risk of the banking mechanism freezing which would cause hardship unless rapidly dealt with. A freeze on transactions via ANZ for example would affect a significant portion of the population. If via Westpac, beneficiary payments, public service pay and tax collection would grind to a halt. The Government needs to plan for this similar to Civil Defence planning and relies on the Reserve Bank to undertake this. In my opinion the Reserve Bank is implementing a daft policy which will make matters worse and damage the incumbent Government’s recommendation.

Urgent housing remedies are needed including legislation and the PM should be consulting urgently with Messers Crosby and Textor on means of obtaining opposition compliance.

The announcement today by the Governor of the Reserve Bank Mr Wheeler, has one simple aim in mind: To “shock” investors and the public in general into believing that these new rules will dampen the property market.

It will do just the opposite and I predict the “shelf life” of the suggested new rules will be less than 30 days.

Adolf Fiinkensein

Aaaaaah. Found it, thanks to Google.

Looks like a variation on restricting their lending via capital to debt ratios.

If the gummint was actually serious about the Auckland housing market it would sack the Auckland Mayor and City Council, appoint Rodney Hide as Commissioner and tell him to fix up the mess. First order of the day, sack most of the planning staff and all the PR staff; second order of the day, release land for ten thousand residential sections; third order of the day, abolish all rate increases for at least two years..

Nostalgia-NZ

Can’t see it interrupting investors at all, they can’t be kept out of the market and why should they be. There are some great investor projects going on in Auckland with a lot of support, Council and Government welcome it as they should.

CharlieBrown

Can someone in the know tell me how this will stop investors borrowing against equity on their existing properties? IE, if I had 2 properties with 50% equity, what would stop me from reducing that equity to 33% and borrowing to buy a new house? I’m sure people that have held onto property in Auckland since 2008 could use their capital gains to borrow to buy another house? Also how do they determine an investor from a non-investor?

Or are most property speculators already up to their eyeballs in debt?

SPC

SPC

Charlie Brown, I agree. The RB Governors concern would be that those owning rental property in Auckland have made a large capital gain of late and they might borrow against that gain to finance purchase of a new property.

This would stop that for those who bought only a year ago with the recent gain being 10-15% (c25% over the past 2 years). But those determined to do so will reduce their level of equity in earlier property investment to finance the 30% deposit regardless.

One thing I would do is quarantine rental property from other income for tax purposes to prevent anyone making a loss on rental property because of low equity being able to transfer the loss against other/non property investment income. Those involved are making untaxed (even when realised) CG, they should not be claiming tax losses while doing so.

swan

The bank has not articulated why it considers this necessary. The evidence of impending financial stability risks just isn’t there. Nor is there evidence that investors are more of a risk than owner occupiers. The RBNZ is starting to really go out on a limb now.

SPC

swan, when a property investor can no longer borrow against rising property value/CG to cover annual losses on rental property (mortgage costs higher than rent income) he is forced to sell down. When that happens there could be a market correction in which banks have mortgages on property assets worth less than the loan – thus a banking credit rating problem.

swan

See the link above (and some other posts on the blog) for a good discussion. Basically credit growth is weak in NZ at the moment and there isn’t much in the way of evidence for credit crises in the absence of strong credit growth.

SPC

swan, a lot of the Auckland market is in the hands of older residents who are mortgage free, when they downsize/sell up those million dollar properties mortgage debt against housing in Auckland will balloon.

The lack of credit growth nationwide is no reason for inaction in the particular market of Auckland property.

swan

“swan, a lot of the Auckland market is in the hands of older residents who are mortgage free, when they downsize/sell up those million dollar properties mortgage debt against housing in Auckland will balloon.”

Is this your view or the RB’s? If this is their rationale, I haven’t seen it anywhere, let alone evidence to back up this claim. Is there any reason they couldn’t wait and see if this credit growth actually occurs? I can’t see this as being a credible reason to intervene in the market.

Nostalgia-NZ

There’s no evidence suggesting that those that all those invest in Auckland property borrow below the new limit. It’s plain that many, possibly most investors are not speculating beyond their means – those that do, however undoubtedly wont rock the boat by falling out of the market leaving it those that do have the means to purchase on higher deposits or with money already on hand. Home owners in Auckland, like elsewhere, are investors long term – that’s where they’ve decided to put their money whether their intention is to sell in 2 years, 10 years or as they reach retirement age. The much spoken about down side of Auckland property prices overlooks that many ordinary buyers can anticipate a long term benefit even if the start is somewhat difficult. All the predictions of the bubble bursting are belied by the fact that when property prices fell in conjunction with the GFC the majority of people simply decided not to sell, some real estate agents hit the wall, the market changed and eventually corrected itself to the point that many who had dug in decided they would sell at a price they decided their properties were worth.

hj

No politician really wants to burst the housing bubble, it makes them look like a kill-joy. Better to let the bubble burst naturally, causing twice the damage but ultimately leaving no one to blame.

If supply were truly the key problem as National claims, why aren’t we seeing Auckland rents rise commensurately with house prices? At present prices the rental return on the Auckland housing stock has dipped below 3 per cent (before depreciation), so any investors buying now must be doing so in expectation of prices continuing to rise. And why wouldn’t they, as they have for the past 45 years?https://garethsworld.com/blog/economics/tax-change-the-right-pin-to-pop-aucklands-housing-bubble/

hj

In BNZ Chief Economist Tony Alexander’s weekly overview, Auckland house prices are set to move upwards nicely. Here are his 19 reasons why:

3. The government is explicitly aiming to grow Auckland’s population as a means of achieving “agglomeration” benefits for economic growth which accrue from high interaction amongst economic players.
9. A big fall in apprentice numbers in the past five years coupled with the loss of skilled people to Australia and older tradespeople leaving the sector rather than get licensed means labour-related construction costs will rise and labour will not be available to build houses even were more land available.
13. The migration cycle appears to be on the cusp of turning and if the housing market has performed so well with net outflows over 3,000 in the past year the implications of positive gains are clear.
14. The nature of net inward migration is changing toward greater numbers of people coming from Asia and with Asia’s middle class booming in size potential inflows of wealthier people are large.
17. The government has announced its efforts to improve housing affordability (lower prices) and they are minor and unlikely to have a noticeable impact if any for many years.

Mr_Blobby

What do you think has kept our economy just above the water line over the lase few decades.

Take out Immigration and we would have become even more of a banana republic than we already are.

Migrant workers pay full TAX. If they are not 100% healthy they do not get a visa or their visa renewed, so that they are not a burden on our overpriced Health system. They do not have access to welfare or any other sort of assistance housing, super etc. No access to our overprice education system.

We should be only changing them about 20% of the TAX we do. Because they are not entitled to the other 80%.

Michael

I believe the Reserve Bank Governor has taken a step in the right direction. Personally I would have gone for 40% , not 30%.
Why would any non investor want a second property apart from say a bach which won’t count unless it is rented out.
This won’t solve the problem but it should help reduce the rate of inflation.

Mark Lloyd

It wont stop an investor buying their 1st investment property or maybe even the 2nd but as their capital gains ‘cash’ dries up from having to use it for larger deposits it will mean they cant buy as many properties till they can recycle the gains from the investment properties they already own. It will all depend on how flush they are as to how many they can carry on purchasing, if at all.

I’m picking some will turn their attention to the regions. Good news for the low CG regions around NZ. They are about to get a bump in capital value perhaps. Some will have to sit for while. None will have to sell anything they already own. It will slow the investors down. Speculators/Traders might be a different story as they buy n sell n buy n sell and might not be building up a portfolio as such. Mind you why stop them? They take a shitbox and invest money in making it more livable or add value in other ways. Good on them. Better quality houses for renters or owner/occupiers alike

As for how to tell who is an investor? Its not hard for a bank to do a search via PropertyGuru to see how many houses you own either in your own name or a trust. More than one property in that name. Investor – Tick

Mr-fattsworth

This decision by the RB wont create any changes for those who want to continue to collect rents in Auckland – all the announcement may bring is a hopeful procurement of peoples consent to the current property rort.